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Market Insights, April 11, 2022

Each week, our Investment team shares its market views with you !

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Essentials

The current uncertain outlook for the global economy is a boon for defensive stocks and sectors. Last week, the Swiss stock market clearly showed that it can withstand this volatile climate. The SPI index gained close to 3%, spurred by its most defensive components. We are still bullish on Switzerland in our investment grids. 

US inflation is expected to have hit 8.4% in March, a notable uptick on February’s figure of 7.9%. Inflation has not yet peaked, and the effects of the US Federal Reserve’s monetary tightening won’t be felt for several more months.  

The number of new COVID-19 infections continued to rise in China, exceeding 27,000 per day, although cities with at-risk areas now account for less than 30% of GDP. This latest wave will have to be brought under control quickly to prevent major supply chain disruptions.

Politics is affecting the forex market

There will indeed be a replay of 2017, with a French presidential run-off between Emmanuel Macron and Marine Le Pen once again. Both the exit polls and the forecasts of who first round voters will switch their ballot to suggest that it will be a tighter contest than five years ago. We can no longer rule out the possibility of the Rassemblement National candidate, Le Pen, winning, which is starting to worry politicians across Europe.

A far-right leader at the head of the eurozone’s second-largest economy would send shock waves through the region and raise many questions about the solidity of European integration. And even if getting rid of the euro is no longer explicitly part of Le Pen’s election manifesto, it seems inevitable that the euro will lose ground against both the US dollar and the Swiss franc if she wins – especially since the single currency is also having to contend with the uncertainty brought about by the war in Ukraine.

The conflict will affect forex markets globally for some time. Among the sanctions against Russia, Western powers’ freeze on the central bank’s dollar and euro reserves is sure to have a long-lasting impact. That’s because central banks in countries with little or no regard for the West’s democratic values may move to diversify the currencies in which their reserve assets are denominated, and this could enhance the global stature of the Chinese yuan.

In the short term, however, the US dollar should be shielded from any impact by the additional yield it offers, particularly compared with the other two major reserve currencies – the euro and the yen.

The Fed is expected to raise interest rates several times this year, while zero or even negative rates could persist for several more months in the eurozone and possibly for several years in Japan. The ongoing conflict between Russia and Ukraine will probably be a boon for the currencies of commodity-exporting countries.

The Australian dollar is worth watching. Australia has extensive natural resources and easy access to the fast-growing Asia Pacific region, so it stands to be a major long-term beneficiary of current geopolitical developments.

France – a rematch between Macron and Le Pen

The first round of the French presidential election turned out as expected – just like in 2017, Emmanuel Macron will face Marine Le Pen in the run-off. The difference this time, however, is that there’s a chance that Le Pen could actually win. For many people, she’s no longer the far-right threat she used to be. Her campaign has focused on the cost of living, a very topical subject given the current surge in oil prices.

It’s also an important issue in times of crisis, since France is one of the developed countries where consumer confidence is most closely tied to purchasing power. Although Le Pen no longer wants to withdraw from the euro, her manifesto includes initiatives that would go against further European integration, which is causing concern in Brussels. 

If the likelihood of a Le Pen victory increases, that could rattle the financial markets, particularly in the period leading up to the run-off, even if Macron actually wins. A lot hangs on who Mr Mélenchon’s voters will cast their ballot for. The financial markets have already started to price in the political risk – French bond yields have reached their highest level since 2015, and the euro continues to lose ground.

We still expect Emmanuel Macron to win, which would be good news for both France and the eurozone. The financial markets would welcome this outcome too. Following the recent correction, valuations and investors’ exposure have dropped off as the bearish sentiment continues. 

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